Resource Exploitation and Growth: Domestic Innovation vs. Foreign Direct Investment

Literature on environment and endogenous growth suggests that sustainable growth critically depends on technological innovations. In this paper, technological progress takes the form of an expansion in the variety of inputs. In a first scenario, a closed economy is endowed with a renewable natural resource. This country invests in the creation of new intermediate goods. A second scenario analyzes two trading economies with no inventors of intermediate goods in the country with the stock of the natural resource, which imports these goods from a technological leading country. Technology diffuses from the technological leader to the follower by foreign direct investment. When the two trading countries are small open economies with no market power, the exchange price is exogenously given. Conversely, assuming the leader is the only supplier and the follower the only purchaser of the intermediate goods, supply and demand decisions, determine the terms of trade. For each different scenario, we prove the existence, uniqueness and saddle point property of an equilibrium path along which countries grow at a constant rate, and the stock of the resource remains motionless. The growth rates under the assumptions of domestic innovation (closed economy) or foreign direct investment (open economies) are compared